Messy Results Reported by IBM

On Wednesday, after the market closed, third-quarter result of IBM was reported. Despite the murmurs of divestiture, currency, and accounting for Red Hat’s acquisition, revenues were quite expected. The surplus exceeded analysts’ expectations, and the company reiterated its full-year forecast. On a normal basis, Red Hat’s revenue increased by 20% year-on-year, which is an increase over time as an independent company. However, due to the emergence of the new z15 system, the weakness in mainframe sales and the decline in sales of the global technology services division affected the company’s performance. Red Hat complicated the third-quarter results of IBM. The software company received around US$ 371 million from Red Hat this quarter. The company would have reported around US$ 987 million if it hadn’t acquired. The reported revenue is significantly less. The difference was due to the elimination of sales between Red Hat and IBM, and purchase accounting. The divestiture of money and assets is also a problem. Excluding these two items and including partial revenue of Red Hat. The revenue of IBM would have declined year-on-year by 0.6%. After adjusting for currency and asset divestiture, cloud computing revenue increased 14% year-on-year to US$ 5 billion.

The global technology services division suffered less than expected client business volumes. Also, the cloud signings increased by 60%, and signing increased by 20%. As the mainframe sales fell by 20%, revenue in the system segment declined. In the quarter’s last week, IBM began selling its new z15 mainframe system so that mainframe revenues will surge in the fourth quarter. IBM used debt to raise funds for the acquisition of Red Hat and is now giving priority to repaying the debt. The company temporarily suspended stock repurchases to make debt repayment a central issue. IBM’s total debt has decreased by nearly US$ 7 billion by the end of the second quarter. IBM’s core debt, excluding liability related to the financing business, is currently US$ 43 billion, a reduction of about US$ 5 billion.

IBM maintains its full-year earnings and free cash flow guidance. The company expects earnings per share of non-GAAP EPS to be at least US$ 12.80, including some fees associated with the Red Hat acquisition. Free cash flow is expected to be approximately $12 billion. As these transaction-related adjustments progress, IBM will be able to identify an increasing portion of Red Hat’s revenue in the coming quarters. Starting in the fourth quarter, the company will receive revenue growth from the z15 mainframe. Thanks to Red Hat and the mainframe business, IBM is expected to achieve revenue growth by 2020, even if the exchange rate continues to be unfavorable whether this income growth is sustainable remains to be seen.